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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
आयकर अपीऱीय अधिकरण, म ुंबई न्यायपीठ “ऐ” म ुंबई IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI BEFORE SHRI G.S.PANNU, AM AND SHRI RAVISH SOOD, JM श्री जी.एस. पन्नू, ऱेखा सदस्य एवं श्री रववश सूद सदस्य ITA No.6853/Mum/2013 (निर्धारण वर्ा / Assessment Year : 2009-10) Asstt.Commissioner of बनाम/ M/s Airoli Flaregas India Pvt.Ltd, 204/205, Sumer Kendra, Income Tax -6(1), Vs. Pandurang Budhkar Marg, Room No.506, 5th Floor, Worli, Ayakar Bhavan, M.K.Road, Mumbai-400018 Mumbai-400020
ITA No.7171/Mum/2013 (निर्धारण वर्ा / Assessment Year : 2009-10) M/s Airoli Flaregas India बनाम/ Addl.Commissioner of Income Tax, Pvt.Ltd, Range 6(1), Vs. Mumbai-400018. Mumbai. ऱेखा सं.:PAN : AACCA2737M अपीऱधर्थी ओर से / Revenue by Shri Durga Dutt प्रत्यर्थी की ओर से/ Assessee by Anuj Kishnadwalla सुनवाई की तारीख / Date of Hearing : 23.5.2017 घोषणा की तारीख /Date of Pronouncement : 23.5.2017 आदेश / O R D E R PER G.S.PANNU, Accountant Member: The captioned are cross-appeals by the assessee and Revenue pertaining to assessment year 2009-10. The appeals are directed against the order of the CIT(A)-14, Mumbai, dated 27.09.2013 which in turn has arisen
2 ITA No.6853/Mum/2013 and 7171/Mum/2013 from an order passed by the Assessing Officer dated 29.12.2011 under section 143(3) of the Income Tax Act, 1961(in short ’the Act).
The respective grounds of appeal raised by the assessee and revenue are as under : By the assessee “1. On the facts and circumstances of the case the Learned Assessing Officer and CIT (Appeal) has erred in disallowing the expenditure, incurred on procuring of design, process and drawing from Hamworthy Combustion Engineering SRL, Italy amounting to Rs.74,09,238/-, U/s. 40(a)(i) for the reason that remittances are made by the assessee to the foreign party (being Nonresident Entity) without deduction of tax at Source. The A. O. and CIT (Appeal) failed to appreciate that tax at source is not required to be deducted from the payment to Hamworthy Combustion Engineering SRL, Italy, as the income earned by such Non Resident Entity is not taxable in India due to absence of Territorial nexus of receipt or accrual of income within the Indian Territory. The A.O. and CIT (Appeal) failed to appreciate that the procurements of design, process and Drawing is in nature of import purchase of goods from a Non Resident Entity which is engaged in the business of manufacture of such products. The A.O. and CIT (Appeal) failed to appreciate that, even if the import purchase of goods is considered as import of Technical Services as per section 9(1)(vii), then also the income of Non Resident Entity cannot be deemed to accrue or arise in India in view of exception provided in clause (b) of Section 9(1)(vii) and that such so called services are rendered outside India, though eventually the Design, Process and Drawings received have been utilized in India 2) On the facts and circumstances of the case the Learned Assessing Officer and CIT (Appeal) are not justified in disallowing the Interest payment of Rs.48,440/- u/s. 40 (a)(ia) paid on Car Loan taken
3 ITA No.6853/Mum/2013 and 7171/Mum/2013 from Kotak Mahindra Primus Limited and TML Financial Services Limited. The A. O. and CIT (Appeal) failed to appreciate the fact that as per sec.194A(3)(iii), interest paid to any banking company to which Banking Regulation Act, 1949 applies is not subject to tax deduction at source and consequently disallowance u/s 40 (a)(ia) is not called for. 3) On the facts and circumstances of the case the Learned Assessing Officer has erred in proportionate disallowance of the Hire charges of Rs.86,048/ - and Rs.82,330/- paid to SMS crane services and S K Rawat & Co. respectively u/s 40 (a)(ia) . The A. O. failed to appreciate the fact that TDS has been deducted and paid by the appellant Company on the said amount u/s 194C of Income Tax Act and not U/s. 1941. Further the said provision u] s 40 (a)(ia) does not provide for any proportionate deduction of expenses but applies only in case of non deduction of TDS or after deduction but nonpayment of same.” By the Revenue “1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in directing the AO to tat the expenditure of Rs.74,09,238/- incurred by the assessee on acquisition of technical design, processing and drawing from Hamworthy Combustion Engineering SRL, Italy, as revenue expenditure, without appreciating the fact that it is a capital asset and yielding enduring benefit to the assessee” 3. The assessee before us is a company incorporated under the provisions of Companies Act, 1956 and is, interalia, in the business of manufacture and supply of Burners and Flare System and Spares and Components, Erection and Installation and Commission of Flare system which are mostly procured by Oil and Gas Refineries. In the assessment year under consideration, it
4 ITA No.6853/Mum/2013 and 7171/Mum/2013 filed return of income declaring total income of Rs.13,66,49,370/- which was subject to scrutiny assessment whereby the total income has been assessed at Rs.14,44,73,970/- after making various additions/disallowances. The assessee company carried the matter in appeal before the CIT(A) who had allowed partial relief against which the assessee as well as revenue are in cross-appeals before us.
In so far as, the grounds of appeal no.1 of the assessee and the ground raised in revenue’s appeal are concerned, the cross-grounds arises from a disallowance of Rs.74,09,238/- made by the AO out of expenditure incurred by the assessee on procuring of design, processes and drawings from Hamworthy Combustion Engineering SRL, Italy. Since cross-grounds relate to the same issue, they are being taken up together.
In this context, the relevant facts are that the AO noted that assessee had debited a sum of Rs.74,09,238/- in the profit and loss account under the head “Engineering Drawings”. It was noticed that the said expenses related to acquisition of Engineering Drawings from Hamworthy Combustion Engineering SRL, Italy. The AO rejected the assessee’s claim of such expenditure being revenue in nature. According to the AO, the expenditure incurred on acquisition of engineering processes and designs represented expenditure incurred to acquire technical know-how which was to be treated as capital in nature. Secondly, the AO noticed that the assessee had not
5 ITA No.6853/Mum/2013 and 7171/Mum/2013 deducted requisite tax at source and therefore on this account also such expenditure could not be allowed as a deduction. Accordingly, in the total income determined, the addition of Rs.74,09,238/-.
The CIT(A) has since upheld the stand of the assessee that the expenditure on acquisition of Engineering Drawings etc was a revenue expenditure. Against such a decision, the revenue is in appeal before us. Further, in so far as, disallowance on account of non-deduction of TDS was concerned, the CIT(A) affirmed the stand of the AO. Against such aspect of the matter the assessee is in appeal before us.
At the time of hearing, the ld. Representative for the assessee, at the outset, submitted that he concedes the position that the expenditure in question was capital in nature and thus, the ground of appeal raised by the revenue deserves to be succeed. It was further submitted that in so far as the ground raised by the assessee is concerned, the same was not pressed. However, the ld.Representative drew our attention to para 4.10 of the assessment order, which reads as under: “4.10 It is evident from the above that expenditure of Rs.74,09,238/- on acquisition of engineering processes and designs debited to profit & loss account represents expenditure incurred to acquire technical know-how. It is the case of the assessee itself that the drawing procured by it was necessary to know about the engineering processes and that it would not have been possible to carry out its business activity without acquiring such technical know-how. Section 32(1)(ii) treats know-how a intangible asset and allows depreciation thereon. It
6 ITA No.6853/Mum/2013 and 7171/Mum/2013 logically follows from section 32(1)(ii) that expenses incurred on acquiring the aforesaid rights including technical know-how would amount to acquiring intangible assets of capital nature so as to be eligible for depreciation there-under. Taking into account the totality of all the fact and circumstances of the case, the expenditure aggregating to Rs.74,09,238/- held to be in the nature of capital expenditure and therefore liable to be disallowed for this reason also. Depreciation thereon as admissible under the Rules shall be allowed once the matter attains finality” 8. On the basis of aforesaid, it is sought to be canvassed that in the event that the expenditure in question is held to be in the nature of capital expenditure, the AO has admitted it to be eligible for depreciation as per Rules. The ld. Representative pointed out that the AO be directed that the depreciation be allowed on such capital expenditure as per Rules. On this limited plea, the ld.DR had no objection since the AO had already noted in the above extracted para that the depreciation admissible under the Rules shall be allowed when the matter attains finality.
In the above background, we therefore, deem it fit and proper to dismiss the ground of appeal no.1 of the assessee and allow the appeal of the revenue. The AO is further directed to allow depreciation as per rules with respect to the impugned capital expenditure. 10. In the result, in so far as, Ground no.1 of the assessee is concerned, the same is dismissed and that of revenue is allowed. 11. In so far as ground No.2 of assessee’s appeal is concerned, the same relates to disallowance of Rs.48,440/- out of interest expenditure, which has
7 ITA No.6853/Mum/2013 and 7171/Mum/2013 not been pressed at the time of hearing for smallness of the amount. Accordingly, the said ground is dismissed as not pressed. 12. The last ground in the appeal of the assessee is with regard to the proportionate disallowance of hire charges of Rs.86,048/- and Rs.82,330/- paid to SMS crane services and S K Rawat and Co.respectively.
It has been explained before us that the said disallowance has been made by invoking the provisions of section 40(a)(ia) of the Act on the ground that the requisite Tax has not been deducted at source.
In this context, the relevant facts are that as per the AO, the payment made by the assessee for hiring of crane was liable for deduction of tax at source at the rate of 10% in terms of section 194I of the Act. Whereas, the assessee had deducted the tax at source at a lower rate in terms of section 194C of the Act. Notably, the stand of the assessee was that tax was liable to be deducted u/s 194C of the Act and not under section 194I of the Act which related to payments by way of rent, etc. In view of the aforesaid position, the AO invoked the provisions of section 40(a)(ia) of the Act and disallowed a part of the expenditure relatable to the short deduction of tax at source. The said action of the AO has since been affirmed by the CIT(A) against which the assessee in further appeal before us. At the time of hearing, the Representative for the assessee relied upon the judgment of the
8 ITA No.6853/Mum/2013 and 7171/Mum/2013 Hon’ble Kolkata High Court in the case of CIT V/s S K Tekriwal (2014) 361 ITR 432(Cal) to point out that section 40(a)(ia) of the Act could not be invoked in the present case, since the issue is of short deduction of tax at source and not a case of non-deduction of tax at source.
On the other hand, the ld.DR appeared for the revenue, and defended the stand of the lower authorities by pointing out that even lesser deduction of tax at source attracts the provisions of section 40(a)(ia) of the Act and that in such situation only the proportionate expenditure is liable to be disallowed. 16. We have carefully considered the rival submissions. In the instant case, the assessee has deducted tax at source, on payment made for hiring of crane services in terms of section 194C of the Act. However, as per the revenue, the payments are in the nature of rent and therefore, the tax ought to have been deducted at source in terms of section 194I of the Act. Pertinently, the provision of section 194I of the Act prescribe for deduction of a higher rate of tax in comparison to the rate prescribed in section 194C of the Act. As per revenue in a case which involves the lesser deduction of tax at source, the payments proportionate to such short fall are also liable to be disallowed u/s 40(a)(ia) of the Act. In our considered opinion, the invoking the provisions of section 40(a)(ia) of the Act in a case of short deduction of tax is not justified, because of the phraseology of section 40(a)(ia) of the
9 ITA No.6853/Mum/2013 and 7171/Mum/2013 Act itself. A perusal of section 40(a)(ia) clearly suggests that it gets triggered only in a situation when a tax is deductible at source but the same has not been deducted. A similar situation has been addressed by the Hon’ble Kolkata High Court in the case of S K Tekriwal (supra), wherein it has been held that no disallowance could be made by applying section 40(a)(ia) of the Act in a case where tax was deducted at source under a wrong provision resulting in short deduction of tax. In our view, the judgment of Hon’ble Kolkata High Court is directly on the point, and therefore, we direct the AO to delete the disallowance of Rs.86,048/- and Rs.82,330/- paid to SMS crane services and S K Rawat and Co.respectively made by invoking the section 40(a)(ia) of the Act. Thus, on this aspect, the assessee succeeds. 17. In the result, the appeal of the assessee is partly allowed and that of the revenue is allowed. The above decision was pronounced in the open court in the presence of both the parties at the conclusion of the hearing on 23rd May, 2017. Sd sd (RAVISH SOOD) (G.S.PANNU) न्याययक सदस्य / Judicial Member ऱेखा सदस्य / Accountant Member म ंबई Mumbai; ददनांक Dated : 23. 5.2017 Sr.PS:SRL:
10 ITA No.6853/Mum/2013 and 7171/Mum/2013 आदेश की प्रयिलऱवप अग्रेवषि/Copy of the Order forwarded to : अपीऱाथी / The Appellant 1. प्रत्यथी / The Respondent 2. आयकर आयुक्त(अपीऱ) / The CIT(A) 3. आयकर आयुक्त / CIT – concerned 4. ववभागीय प्रतततनधि, आयकर अपीऱीय अधिकरण, मुंबई / DR, ITAT, Mumbai 5. गार्ड फाईऱ / Guard File 6. आदेशान सार/ BY ORDER, True copy उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीऱीय अधिकरण, मुंबई / ITAT, Mumbai